EU summit fails to satisfy the markets - Business Works
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EU summit fails to satisfy the markets

Richard Driver of Caxton FX M ovements in the exchange rates today indicate a clear dissatisfaction with the decisions (or lack thereof) made at last Fridays 'crunch' EU Summit. Various commitments were made, notably in the form of a new fiscal compact that will usher in tighter budget deficit rules. This will guard against future sovereign debt crises cropping up in the future, but it doesnt do a great deal to solve, or ease concerns surrounding the current and worsening eurozone debt crisis. The European Stability Mechanism (the permanent bailout fund) will be activated a year early in mid-2012 another longer-term measure. A further €200bn of aid will also be made available positive, but hardly the sort of 'bazooka' style measure that has been mooted of late.

The European Central Bank has refused to step up its bond-buying and Italian bond yields have risen as a result. This reveals what the market thinks of the decisions made at last weeks Summit. Moodys has joined fellow ratings agency Standard & Poors in warning of possible eurozone debt downgrades. Moodys cited 'an absence of decisive policy measures'. Decisive is the operative word here and the adjective that continues to elude EU leaders. Further downgrades in the eurozone are looking likely now, and the euro appears more vulnerable than ever.

The euro guarded against losses in the immediate wake of the EU Summit, but it has made a terrible start to this week. The market has had to come to terms with, and is pricing in, the fact that this eurozone crisis is going to roll on for months to come. This should not come as too much of a surprise, but expectations of ground-breaking progress really had reached new levels in the past fortnight. Accordingly, GBP / EUR has posted new nine-and-half month highs up above €1.1825, and the euro has crashed to fresh eleven month lows below 1.32 against the US dollar. The euro has fallen and fallen hard, and our pessimistic view of EU political stalling is finally being reflected in the exchange rates. In addition to the headline fiscal issues plaguing the euro, data this week are likely to highlight the economic issues the eurozone is facing. German economic sentiment data are expected to be poor tomorrow and eurozone manufacturing and services data are likely to stoke prevailing fears of another eurozone recession.

Sentiment towards the US economy improving

Away from the furore surrounding the EU Summit, US consumer sentiment data hit a six-month high on Friday, providing further indication that the slowdown we have seen across the Atlantic for much of this autumn may well just be temporary.

The same cannot be said of the UK economy; UK employment (Wednesday) and retail sales data (Thursday) highlights the scope for some sterling negativity as the week progresses.

End of week forecast

Sterling is trading impressively at €1.1825, and the euro looks hard-pushed to rebound in the current low-confidence environment. Key options levels at 1.3250 on the EUR / USD pair have now given way and safer currencies such as sterling and the US dollar have made an excellent start to the week. We can expect there to be further volatility this week and it certainly wont be one-way, but we do expect the current risk-off climate to continue favouring safer currencies, and punishing the euro. Currently trading at $1.56, sterling has held up pretty well against the US dollar, but a heavy EUR / USD pair should limit any upward sterling moves.

End of week forecast
GBP / EUR 1.1850
GBP / USD 1.5550
EUR / USD 1.3125
GBP / AUD 1.5750

Richard Driver is a Currency Market Analyst with Caxton FX and can be contacted via:

This brief is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

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